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07/24/2013

Economic Publications

Brazil’s economy: Worrying weaknesses?

Ranked seventh in the world (and the second largest emerging economy) by GDP size, Brazil is the archetypal emerging country. It brilliantly passed the test of the major 2009 crisis, demonstrating the strength of its economic fundamentals and the maturity of its political institutions. But, the Brazilians’ legendary optimism has been sorely tested for the last two years: weak growth, loss of industrial competitiveness and, more recently, massive protests by a population that is becoming restive ... Can the Brazilian economic engine be repaired?

This panorama offers an overall focus, dealing with economic challenges, sociopolitical issues and a sector by sector analysis. The weak growth and the social tensions are the result of structural problems relating less to classical economic policies than to reforms affecting infrastructures and education, matters which, as Cristiano Souza of Santander emphasises, “cannot be resolved in the short term". According to Luiz Rabi of Serasa, low growth means there will be no decline in the company bankruptcy rate. On the one hand, businesses are benefitting from healthy household demand, but on the other hand, interest rates and the weakness of global activity are affecting their performance.

In all the sector analyses presented in this panorama (chemicals, steel, automotive, retail, agro-food) the notorious “Brazil cost” comes up again and again as a decisive disadvantage. For example, the cost of energy is a burden on the steel industry; upward pressures on wages are eroding the competitiveness of the chemical industry. The small producers in the agro-food sector suffer from a lack of access to new technology. However, Brazil’s entrepreneurs benefits from two key strengths. First, the heavy involvement of the authorities is a constant – even to the extent of adopting protectionist measures. Fernando Figueiredo, Executive President of the Chemical Industry Association, analyses the competitiveness council given to the chemical industry as “a final push in the right direction” towards recovery. Another strength: admittedly, the growth in middle class incomes contributes to the rise in prices, but it sustains the automotive industry and retail trade, two key sectors. The Brazilian middle class, which is equipping itself, is attracting profit-seeking international investors, as evidenced by the interest of Korean and Chinese car manufacturers. In short, the country holds all the cards needed to inspire the hope that this immense market will take off again...